Hats off to the NBA and new commissioner Adam Silver for acting swiftly and decisively today in dealing with recently surfaced racist comments from Los Angeles Clippers Owner Donald Sterling. The NBA displayed a zero tolerance for racism in the league by banning Sterling for life, fining him $2.5 million, and effectively forcing him to sell a team he has owned for more than 30 years. Once the laughingstock of the NBA, the Clippers are now a top team featuring two of the most exciting players in the league in Blake Griffin and Chris Paul, and will be a highly desirable asset when they hit the market.

The Milwaukee Bucks grabbed headlines for the first time in ages this month when they were purchased by Wesley Edens and Marc Lasry for an NBA record $550 million. Despite playing in one of the NBA’s worst stadiums, having the NBA’s worst team, playing in one of the NBA’s smallest markets, and being ranked as the NBA’s least valuable franchise; the Bucks managed to command a 36% premium over their most recently estimated value as per Forbes. Marc Cuban wasted no time in declaring the purchase to be a bargain, stating that he believes the true value of an NBA franchise is in excess of $1 billion.

When Forbes released their annual list of team valuations in January, they pegged the Clippers at $575 million, good for 13th in the league. If the Clippers were to command a similar 36% premium to this figure, they would be valued at $782 million. Although being a lofty figure, I believe this mark will be easily eclipsed. While the sale of the Milwaukee Bucks was met with almost zero fan fare and was done very much under the radar, the imminent sale of the Clippers will be highly publicized and is likely to create a bidding war, as numerous parties have already been named as potential suitors and more are sure to arise over the coming weeks. Its not hard to see the Clippers fetching bids in the range of $800 million – $1 billion. Such a number would force people to reconsider the value of all NBA franchises, which would be nothing but beneficial to Madison Square Garden (MSG) shares. A 36% increase to Forbes’ valuation of the New York Knicks would bring their value to $1.9 billion, a 50% increase would see them worth $2.1 billion. Such a revision upwards should be seen as significant for Madison Square Garden as a whole, as they currently sport a market cap of only $4.2 billion, potentially providing a boost to their long-stagnant stock. I believe shares of MSG are significantly undervalued based on a sum of the parts analysis and view Madison Square Garden stock as a strong buy.

Less than two weeks after receiving a $200 million bid for their Fuse TV Network from both Diddy and Jennifer Lopez, Madison Square Garden (MSG) has reportedly received a $350 million cash offer from Artist Series Inc. Relatively unknown, Artist Series is in the process of securing financing for both the transaction and an additional $200 million for operating costs. Management has yet to respond to any of the bids they have received thus far. When we first recommended purchasing shares of MSG in October, we noted that J.P. Morgan was in the process of shopping Fuse TV around. At the time we expected Fuse would fetch anywhere from $300 – $400 million in a sale, right in line with the offer from Artist Series. With three parties expressing interest in such a short period of time, we could see an upward revision to the current bid. Madison Square Garden’s stock has been extremely range bound since our recommendation. A sale of Fuse TV coupled with the recent hiring of Phil Jackson as President of Basketball Operations could help awaken shares of MSG and get them moving towards fair value. I continue to view Madison Square Garden as a strong buy.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article.

Having been away from the market with other obligations for the past month or so, I thought it would be interesting to review our 2013 picks before making any new recommendations in 2014. Since launching in late September, we have published buy recommendations on 5 different companies: Melco Crown Entertainment (MPEL), Madison Square Garden (MSG), Take Two Interactive (TTWO), Yahoo (YHOO), and Foot Locker (FL). While the S&P 500 and Nasdaq finished out the year strong, our picks have easily outperformed the broad markets, returning an average of 16.5% vs. 7.5% for the S&P 500. A brief update on each of our recommendations below…

Melco Crown Entertainment (MPEL): City of Dreams Manila and Studio City Macau

Macau as a whole has been the recipient of quite a bit of attention around here since launching, and for good reason… Macau has been the world’s fastest growing economy over the past decade with average annual GDP growth near 15%. It generates more than 7x the revenue of Las Vegas and is the gambling epicenter of the world. Melco Crown’s City of Dreams is one of the most impressive properties in Macau and dominates the ultra important “Premium-Mass” market in the region. MPEL’s revenues and profits stand to explode over the next two years as they open two new massive properties, Studio City Macau and City of Dreams Manila. Studio City boasts the best location on the Cotai Strip, Macau’s version of Las Vegas Blvd., and is poised to be one of the biggest beneficiaries of the continued growth of the Macau. Despite the 36% gain since our initial recommendation of their shares, I continue to view MPEL as a strong buy for the foreseeable future.

Madison Square Garden has been the laggard of our model portfolio thus far, currently down 1% since our original recommendation. The New York Knicks have gotten their season off to a terrible start this year, however there has been little to no other news or events out of MSG in the past 3 months. With the Madison Square Garden renovation project finally complete, cash flows and earnings will start becoming normalized for the first time since their IPO. The real story here though remains the hidden value of the company’s array of assets. As the owner of the Knicks and Rangers, MSG Networks, Madison Square Garden Arena and its associated air rights, and numerous other venues/ assets; MSG remains greatly undervalued when using a sum of the parts analysis. This one may require some patience, but I continue to view MSG as a strong buy.

Take Two Interactive (TTWO): Massive Cash Hoard, Best IP Portfolio in the Industry

Although shares of Take Two have appreciated since our recommendation, they have lagged the market, which is somewhat perplexing after Grand Theft Auto V shattered analyst estimates and became the highest grossing entertainment release ever. While analysts anticipated TTWO would sell 18 million units of GTA V during their most recent quarter (a number I reported would prove to be very low), 25 million copies were actually sold. TTWO stock failed to jump on this news though, they actually traded down sharply the next few sessions as management failed to give much clarity regarding their future pipeline/ next blockbuster release. TTWO’s haul from GTA V should leave the company with more than $1B worth of cash on their balance sheet. With a market cap of only $1.6B, this cash hoard is substantial. Take Two also owns arguably the most valuable intellectual property portfolio in the industry with proven franchises such as GTA, BioShock, Red Dead Revolver, Max Payne, and NBA 2k. Despite management remaining mum on the next big release for now, they have an amazing track record when it comes to making hits. Everything considered, I see fair value for Take Two stock between $22-$24, at least 25% upside from today’s closing price. I maintain a buy rating on shares of TTWO.

As Alibaba continues their rapid growth, Yahoo continues to reap the rewards. Despite a core business that is still struggling to gain momentum, Yahoo had a great 2013 with shares more than doubling during the year. New CEO Marissa Mayer has been on quite the shopping spree since taking the helm, with Yahoo acquiring 28 companies in 2013, including a $1B purchase of Tumblr. Mayer has made it clear that she intends to ensure Yahoo remains the world’s homepage while also placing a large emphasis on mobile and content creation. In a demonstration of their commitment to content, Yahoo recently hired Katie Couric as a ‘global anchor’ and released a new News Digest App. It is yet to be seen how any of this efforts will pan out, but if nothing else, Mayer has been ambitious. YHOO should still see some upside from Alibaba as it nears its inevitable IPO and could get a lift from the news when announced, but shares aren’t as much of a bargain as they were 3 months ago. If you already own YHOO stock I wouldn’t be in any rush to sell it, but I wouldn’t be in any rush to go out and buy more either. I view shares as undervalued still with 10-15% upside, but would need to see core operations start to show signs of improvement before considering YHOO a strong buy at current levels.

Foot Locker (FL): Buy into Nike, Adidas, and Under Armour’s Growth at a Discount

Last but certainly not least of our recommendations during 2013 was Foot Locker. The athletic apparel industry has been one of the strongest performers of the past 25 years. Nike is one of the all time great growth stocks and shows no sign of slowing momentum. Adidas and Under Armour fit the same mold. Justifiably so, all three of these companies trade at lofty valuations. Foot Locker is the largest retailer of athletic shoes in the US, dominating the market with the portfolio of brands including FootAction, Eastbay, Champs, and of course their namesake stores. Management has proven to be shareholder friendly, approving a $600 million buyback and an 11% dividend hike last year. While many retailers reported lackluster earnings in their most recent quarter, Foot Locker easily exceeded both earnings and revenue estimates. Despite all of this, shares still trade at a significant discount to retailers such as Finish Line and Dick’s Sporting Goods. The athletic apparel industry has shown no signs of slowing, and Foot Locker is as well positioned to benefit from this trend as anyone. As long as they continue to trade at such cheap valuations relative to their peers, I will continue to maintain a buy rating on shares of FL.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article.

When to Buy Madison Square Garden (MSG)?

Madison Square Garden (MSG) is one of our top picks at the moment based on our belief that the sum of their parts is worth far more than the market is currently valuing the company. Taking a glance at their chart, they appear to be near an optimal entry level for the long term. Over the past 9 months, MSG shares have failed to trade meaningfully below $55, only closing beneath that number by a few cents on two occasions. Despite a very positive earnings report, the completion of the Madison Square Garden arena renovation project, and the opening of the NBA & NHL seasons in the past few weeks, MSG is trading at a 3% discount from our first recommendation to buy them. Currently at $55.75, Madison Square Garden is very near the ideal time to enter a position from a technical perspective.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article.

In October I published an analysis on Madison Square Garden (MSG) and highlighted the company as a strong buy and one of our top picks. Despite another strong month for the markets, shares of MSG are down 3% since I recommended them, despite releasing some positive news over the past few weeks. First MSG announced that renovations at Madison Square Garden had been completed just in time for the start of the New York Knicks and Rangers seasons. The project had been ongoing for more than 3 years and cost $1 billion. For the first time since spinning-off from Cablevision, Madison Square Garden will have normalized cash flows now that their renovations are finished, opening the door for a potential dividend or share repurchase. Then last week, MSG reported Q1 2014 results that beat analyst expectations. Madison Square Garden earned $0.31 per share, easily topping the $0.22 consensus estimate. They also beat on revenues by $3 million, generating sales of $215 million for the quarter.

While some investors in MSG may have been frustrated by the muted response the aforementioned developments received, this is an asset play, patience is a necessity. We do not anticipate any news out of Madison Square Garden that will offer much of a surprise. Their business is relatively consistent and easy to model, they are not going to shock anyone with growth. Our investment thesis is based on the markets not understanding the true value of MSG’s assets. These assets have been undervalued for years now, and although shares have been gradually appreciating towards fair value they still have a long way to go. In our analysis published last month we concluded a fair enterprise value for Madison Square Garden existed between $7.9- $8.5 billion. We came to this price by valuing MSG Media at $4.4- $5 billion, the Madison Square Garden Arena and its air rights at $2 billion, $1.15 billion for the Knicks and Rangers, and $350 million for their other venues. Madison Square Garden’s current EV is only $4.1 billion. The slight decline in share price since our initial recommendation merely provides a better valuation, the underlying story has not changed at all, MSG is still a strong buy and one of our top picks.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article.

Spun off by Cablevision in early 2010, Madison Square Garden (MSG) has seen its shares triple since coming public, currently trading just 10% shy of all-time highs. Despite this run-up, I believe there is room for further appreciation. For the purposes of this report, we will view The Madison Square Garden Company as a holding company, and use a sum of the parts analysis to determine what we believe to be MSG’s intrinsic value. Much more than just their world-famous arena, this company is composed of numerous valuable assets and operates in three segments: MSG Media, MSG Entertainment, and MSG Sports. MSG Media is made up of MSG Networks and Fuse Networks, who is currently being shopped around by J.P. Morgan. The entertainment segment hosts and presents various concerts in MSG’s venues, as well as creates and produces various live acts such as the Rockettes. The MSG Sports segment houses the New York Knicks and New York Rangers, two of the most valuable franchises in their respective sports. Also of significant value is the companies namesake, the Madison Square Garden arena, the most iconic sports and concert venue in the world. All pieces accounted for, MSG contains an extremely valuable collection of assets that can be easily distinguished and valued.

MSG Media: MSG Networks and Fuse Networks

MSG Media is the most valuable segment of the company, accounting for nearly half of the total revenue. MSG Networks, broadcaster of the New York Knicks and Rangers games, is one of the most profitable regional sports channels in the country. In recent years the value of regional sports broadcast rights has exploded, the Los Angeles Lakers are in the first year of a 20 year, $3 billion deal with Time Warner. Even more recent, Time Warner secured the rights to broadcast the Los Angeles Dodgers games for the next 25 years for $8.5 billion, the largest such contract in history and one that will set the precedent for regional rights contracts to be negotiated in the future. In the past 12 months, MSG Media produced Adjusted Operating Cash Flow (AOCF- defined as operating income before depreciation, amortization, share-based compensation, and restructuring charges) of $349.5 million and operating income of $328.6 million, increases of 35% and 44% respectively. While Fuse Networks is accounted for in these numbers, it is worth noting that MSG Networks commands $4.91 per subscriber monthly while Fuse charges providers only $0.06 per viewer per month, so we will assume Fuse’s contribution to profitability numbers are next to nothing. Traditional media companies such as CBS (CBS), Viacom (VIA), Disney (DIS) and 21st Century Fox (FOX) generally trade at 10-12x EV/EBITDA. Applying these multiples would yield a valuation range of $3.4 billion- $4.1 billion for MSG Networks. With earning growth rates far outpacing those of CBS, DIS, FOX and VIA, and the exploding values of regional sports TV contracts, I view valuation multiples in the 12-14x EV/EBITDA range as more appropriate for MSG Networks. MSG has recently retained J.P. Morgan to explore a sale or any strategic alternatives after being approached by multiple parties expressing interest in acquiring Fuse. Analysts expect a sale and expect it to net $300-$400 million. Assuming a fair valuation range of $4.1 billion- $4.75 billion for MSG Networks given our suggested 12-14x EV/EBITDA multiple, and an expected $300- $400 million of value unlocked through a sale of Fuse, I believe the MSG Media segment is worth $4.4- $5 billion.

As of today’s close, MSG has an enterprise value of $4.15 billion. Yes, by buying at current prices you are buying MSG Media at a slight discount and getting a bunch of other extremely valuable assets for free at the same time, so lets determine what these other assets are worth.

MSG Sports: New York Knicks and New York Rangers

For the purposes of valuing the New York Knicks and New York Rangers, we are going to begin with the most recent Forbes valuations of each and make some necessary adjustments to determine their worth. Forbes currently estimates the Knicks value at $1.1 billion and the Rangers at $750 million. Of this combined $1.85 billion, $543 is attributed to the stadium, which we will back out of our valuation. For their valuations Forbes defines “market” as the portion of a franchise’s value attributable to its city and market size. While a subjective figure, Forbes places a value of $838 million on the “market” for the two franchises. With about half of the Knicks media revenue generated locally through their TV stations, and 70% for the Rangers, we will adjust the value of their “market” to reflect that fact that we have already valued MSG Network separately. I don’t feel it is fair to discount a full 50% and 70% respectively of their values as they generate revenue in other avenues and I feel a good deal of their “market” value is derived from the fact that they are two of the most storied franchises in the NBA and NHL and have fans that will show up win or lose, so we will take 15% off the Knicks and 25% off the Rangers Forbes “market” values. After these adjustments and backing out the value attributed to the stadium, we place a value of approximately $1.15 billion on the two franchises, a number that seems extremely cautious given the inflated prices over perceived true valuations that sports franchises have been acquired for in recent years.

Outside of the Garden, MSG has a sizable portfolio of properties consisting of Radio City Music Hall, the Beacon Theatre, the Forum, the Chicago Theatre and the Wang Theatre. They also own the production company for numerous shows hosted at these venues, most notably the Rockettes. We estimate the value of these properties at $350 million.

Hidden Value in Madison Square Garden Arena and Air Rights

And last but certainly not least, is the Madison Square Garden arena itself, arguably the most famous sports venue in the world. This month will see the completion of a $1 billion renovation project that has been ongoing for years at the Garden, finishing a long needed overhaul that greatly improves the value of the building itself. More valuable however are air rights among other things, assets found nowhere on MSG’s balance sheet, from their Form 10…

We own the Madison Square Garden building, the platform on which it is built and certain development rights (including air rights) associated with the lot. Madison Square Garden sits atop Pennsylvania Station, a major commuter hub in Manhattan, which is owned by the National Railroad Passenger Corporation (Amtrak). While the development rights we own would permit us to expand in the future, any such use of development rights would require various approvals from the City of New York.

The real estate around Madison Square Garden is owned primarily by Steve Roth and Vornado Realty Trust. He has been pushing unsuccessfully for years now to get the Port Authority to fund a purchase of Madison Square Garden arena and its air rights, so that Penn Station can be transformed through a massive renovation. The project has been unable to gain footing because of the highly restrictive costs of buying Madison Square Garden and its air rights, a transaction estimated to require $2 billion to complete. This number may sound high but when you consider that the aforementioned development rights account for 5.4 million sq ft, through simple calculations we can see it is not. At a conservative $250 per square foot, 5.4 million square feet would be worth $1.35 billion. If we place a value of 65% of the completing renovation’s costs, the arena itself would be valued at $650 million, placing a value of $2 billion on Madison Square Garden arena and its development rights.

MSG is a Buy at Current Levels

Having now placed an individual value upon all of Madison Square Garden’s meaningful assets, we can sum up the parts and come up with a fair value of the company as a whole. We have placed a valuation of $4.4- $5 billion on MSG Media, $1.15 billion on the Knicks and Rangers, $350 million on venues outside of the Garden, and $2 billion on Madison Square Garden and its air rights. After summing these figures up, I believe an enterprise value of $7.9- $8.5 billion would represent a fair valuation of the Madison Square Garden Company, a significant premium to today’s closing EV of $4.15 billion.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article.